What is bankers' automated clearing system (BACS)?

What are BACS payments?

The BACS system facilitates bank transfers across the United Kingdom. It allows financial transactions between individual accounts and companies through three primary services: BACS Direct Debit, BACS Direct Credit, and Current Account Switch Services.

BACS Direct Debit

Direct Debit payment is among the UK's most commonly used payment methods, after cash and cards. It is cost-effective and easy to use. This service is suitable for regular payments (such as subscriptions and utility bills), as well as one-off transactions.

Direct Debit allows individual account holders to authorize automated withdrawals from their accounts as long as they are informed in advance about the payment amount and date. The authorization process involves submitting a Direct Debit Mandate form—which can be either a physical form or an online form. 

BACS Direct Credit

BACS Direct Credit is mainly used for bulk payments, such as employee wages, pensions, or supplier invoices. This service allows organizations to deposit funds directly into the recipient's account, usually through an authorized third-party payroll provider. BACS Direct Credit enables companies to streamline payments and can assist in making better-informed financial decisions by providing insights into cash flow.

The Current Account Switch Service

The Current Account Switch Service (Guarantee) enables a service user to move their bank accounts from one UK financial institution to another, charge-free. When a company decides to transfer its account to another UK bank, Account Switch Service covers the entire process, from transferring the account holder's previous banking activities, including their balance, to a new account to closing the former account.

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A BACS payment processing: Step-by-step

BACS processing has a three-day cycle and usually takes up to three business days to complete. To avoid processing delays for Direct Debit and Direct Credit fund transfers, BACS asks payers to verify payee identity, which includes information such as the name, account number, and sort code to ensure safe transactions. 

Day one: The payer submits a payment request that includes the sender's and recipient's names, bank accounts, and sort codes. If the request is sent to BACS by a set cut-off time, typically 10.30 p.m., it will be processed in the standard three-day cycle.

Day two: The BACS system processes the request and forwards it to the recipient's bank for verification. The payee's bank reviews the transaction and, based on internal checks, accepts or rejects it.

Day three: If the payee's bank accepts the payment, the funds are deposited into the payee's account by the end of the third day. 

What is CHAPS?

CHAPS, or the Clearing House Automated Payment System, is a subsidiary of the Bank of England. It is primarily used for high-value transactions, usually over £10,000, and is available to financial institutions (FIs) with settlement accounts at the Bank of England. CHAPS transfers typically get finalized on the same business day, but transaction fees can be significant. 

How does CHAPS work?

First, a business must hold an account at a bank that is part of the CHAPS network to use CHAPS payments.

Transferring funds through CHAPS starts when the payer sends certain information to their bank, including:

• The payee's name, account number, and other relevant bank details
• The amount to be transferred

The payer's bank submits these details to CHAPS, which processes and settles the payment. Although most CHAPS transactions are settled on the same day, requests submitted after the cut-off time may be processed the following business day. 

The difference between CHAPS and BACS

The main difference between CHAPS and BACS is that CHAPS offers faster payments. Those who opt to use BACS transfer services go through the three-day processing cycle, while CHAPS offers same-day transfers. 

Another difference is the cost. BACS service is typically more cost-effective. CHAPS high-value payments come with significant transaction fees, often between £15-£35 per transfer, while the BACS base transaction fee doesn't exceed 50p. 

Both options are available for domestic transactions. Companies or individuals that need to make international payments should look for alternatives, such as SWIFT (Society for Worldwide Interbank Financial Telecommunication), which enables secure cross-border payment between financial institutions globally.

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What is a BACS-approved bureau?

A bureau is an organization that submits Direct Debit or Credit payment requests on behalf of its customers (service users). Bureaus can handle both the creation and submission of payment files or simply submit the files prepared by their clients. 

An organization must pass the BACS inspection review to become an authorized bureau under the BACS Approved Bureau Scheme. Once authorized, a bureau is reviewed every three years or after significant organizational changes. 

Over 50% of organizations using BACS opt to make their Direct Debit and Credit payments through authorized bureaus rather than using Bankers' Automated Clearing Services independently. Common reasons include:

• Limited Direct Debit or Credit monthly payments, making it inefficient to operate independently.
• Cost-savings by outsourcing rather than creating a department for BACS payments.
• Inability to meet the criteria for obtaining the SUN (service user number) required for direct BACS payments.

FAQ about BACS

What types of payments are best suited for BACS?

BACS is ideal for non-urgent, recurring, bulk payments, such as salaries, pensions, and supplier payments. While it is not the fastest banking option, it is safe and cost-effective, with lower fees per transaction compared to other payment methods, such as CHAPS. 

What happens if a BACS transaction fails? 

When BACS payment fails, the sent amount is returned to the payer's account, and the payer gets notified. Possible reasons for failure can include insufficient funds or incorrect verification details. Double-checking before submitting the payment request is of the utmost importance for smooth transactions. 

What are the limits for BACS payments?

BACS usually doesn't impose transaction limits. However, individual banks may have limits regarding BACS transactions. So, it is always better to check with the bank if there are any BACS transaction restrictions.

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